Africa’s under used gas reserves, either exported or burnt away into the sky, are set to play a big role in stemming the continent’s crippling electricity void, a shift that should boost economies and small-cap energy firms.

Sub-Saharan Africa contains some of the fastest growing and most dynamic economies in the world but electricity shortages deter investment, pushing up business costs and sustaining poverty and inequality.

The World Bank estimates electricity outages on average cost African countries around 2.1% of GDP with current output only meeting half of demand and 70% of the continent’s population living without power.

With the exception of South Africa, which uses coal almost exclusively to generate electricity, the rest of Africa relies mostly on expensive and dirty diesel imports. Gas is a cheaper and cleaner alternative.

Driven by huge recent finds in East Africa, sub-Saharan gas reserves have more than doubled in the last 20 years to around 310 trillion cubic feet, around 5 percent of global supply, according to the US Energy Information Administration (EIA).

The region’s gas output has already grown by 10% a year in the last decade, but most of this has been exported by Nigeria, Equatorial Guinea and Mozambique through liquefied natural gas (LNG) terminals, the EIA says.

However, a shale gas boom in the United States, LNG expansion in Qatar and Australia and slow growth among consumers has created a global gas glut. Meanwhile LNG projects in Angola, Mozambique and Nigeria are hitting stumbling blocks.

“What we’ve seen in Africa recently is a growing domestic obligation or a realisation that there are other benefits to growing your gas infrastructure, including gas-to-power.”Rising power

The International Energy Agency (IEA) said in its first Africa Energy Outlook this week that it expects the continent’s electricity generation to quadruple by 2040 with gas-to-power growing its share to 25%, from 17% now.

In West Africa, gas will make up 50% of overall electricity output by 2040, the IEA said, driven by reforms in Nigeria, home to the world’s eighth largest reserves.

Emerging market-focused investment bank Renaissance Capital (Rencap) said African-focused oil and gas companies would also benefit from rapidly spreading government incentives given to develop oil and gas for domestic use, known as “indigenisation”.

The bank sees the biggest upside potential in Nigeria’s Seplat , Lekoil and Canada’s Africa Oil, which operates mostly in East Africa.

Gas is becoming profitable enough to tempt energy firms but remains cheaper for consumers than oil for power generation.

In Nigeria, gas prices have risen from $1 per million British thermal units (Mbtu), to around $3 Mbtu in the last three years and should increase further, trade sources say.

A United Nations backed report released in May calculated gas in East Africa could reach power plants at between $5 to $15 Mptu, depending how close they were to the source. Diesel can cost African industry $20 to $40 Mbtu, experts say.

“We believe surging domestic demand coupled with growing regulatory changes take the economics of sub-Saharan gas to a new level,” Rencap said in a research note this month.

Further impetus has been provided by US President Barack Obama who has made cutting electricity shortages his legacy policy on the continent, in a project called “Power Africa”, which will include $7bn in US financial support.

There remain major hurdles, including implementing commercial gas pricing, building expensive infrastructure and working alongside competing LNG projects.Challenges

Nigeria, Africa’s energy giant, has struggled to overcome these problems but the oil ministry has said using gas domestically is its biggest priority, a drive which has coincided with two LNG projects grinding to a halt.

Nigeria defied many critics by completing a relatively successful privatisation of the state-power company two years ago, while locally-owned oil companies are exploiting gas reserves after buying assets from oil majors in recent years.

Progress on reforms has been slow and government projections to increase power output tenfold by 2020 are unrealistic but changes, including lifting domestic gas prices, are in motion.

“Progress was glacial for three decades. The price of gas was a tenth of the commercially viable price,” said David Ladipo, whose company Azura is spending $750m to build a 450 MW gas-to-power plant. Seplat is providing the gas.

“It has taken two years for privatisation to progress and we’re starting to see the benefits. This year has been the turning point,” Ladipo added.

Tanzania has set out energy policy which prioritises domestic gas use over LNG. US-firms Symbion Power and General Electric have already committed nearly $1bn to building power plants there.

Mozambique, which has had the world’s largest natural gas discoveries in a decade, two months ago passed a petroleum law which will force oil companies developing LNG projects, including US firm oil Anadarko Petroleum and Italy’s Eni, to use 25% of production domestically.

Mozambique is also carrying out a study, partly-financed by the World Bank, for a pipeline linking its gas reserves to neighbouring countries with the continent’s most developed economy, South Africa, offering a huge potential market.

Africa Oil, partnered with Marathon Oil Kenya, said in June it was talking with the Kenyan government about fast-tracking a gas-to-power project at its well in the north of the country, which could hold up to 1 trillion cubic feet of gas.

– Reuters

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